In the high school gymnasium of an Arizona community hard-hit by the housing crisis, U.S. President Barack Obama unveiled his latest rescue scheme for the economic crisis: an ambitious $75-billion (U.S.) plan to stem foreclosures that aims to keep as many as nine million households from losing their homes.
But the painful reality for the U.S. president is that the housing crisis, like the banking crisis and the recession, continues to worsen after stubbornly defying all previous government interventions.
Mr. Obama's housing plan may keep millions in their homes, but is unlikely to help the housing market stabilize, analysts warned yesterday. Housing prices are still falling in virtually every major U.S. market, plunging millions of indebted Americans into a black hole, where they owe more on their mortgages than their homes are worth. Each notch down in prices produces more foreclosures, and a new wave of toxic debt for the besieged banking industry.
"This bailout is likely to simply delay a day of reckoning for the banks, at great cost to taxpayers and little obvious benefit to homeowners," warned Dean Baker, co-director of the Center for Economic and Policy Research in Washington.
At the same time, the rapidly deteriorating economy is producing new challenges - rising joblessness and waning confidence - that risk feeding back into the housing market.
Citing a recent "sharp contraction" in economic activity, the U.S. Federal Reserve Board joined many private-sector economists yesterday in downgrading its key economic forecasts. The Fed now expects the economy to shrink between 0.5 and 1.3 per cent this year and that unemployment will rise to between 8.5 and 8.8 per cent, up from 7.6 per cent now, according to the minutes of its January meeting. The forecast is significantly worse than its previous one, issued in mid-November.
The faltering economy puts Mr. Obama in the position of trying to tackle a problem that grows worse with each passing day. Many experts say that Mr. Obama's mortgage plan has little chance of being any more successful than four previous government bids, since mid-2007, to stem mortgage defaults, including the much-discussed but little-used Hope Now initiative.
Under Mr. Obama's plan, the government would subsidize lenders to lower monthly payments for up to four million borrowers facing foreclosure. Help is also on the way for another four million to five million families with so-called "underwater" mortgages, via new loans to government-controlled mortgage lenders Fannie Mae and Freddie Mac.
"While this crisis is vast, it begins [with] just one house and one family at a time," Mr. Obama said in Mesa, Ariz., where he unveiled the plan.
But the plan still leaves as many as 10 million home owners "underwater" on their mortgages, Mr. Baker said. Of the nearly 52 million U.S. homeowners with a mortgage, about 13.8 million, or nearly 27 per cent, owe more on their mortgage than their house is now worth, according to Moody's Economy.com.
McGill University finance professor Mo Chaudhury acknowledged that $75-billion is a "drop in the bucket" in relation to the size of the mortgage market. But he said the severity of the crisis leaves Mr. Obama with few palatable options.
"If you leave it to the market, it's going to take much longer and the pain will be excruciating," Prof. Chaudhury said.
Staving off foreclosures could actually get in the way of the market's stabilization, some economists suggested. "The mad attempt to avoid any and all foreclosures is counter-productive," said Barry Ritholtz, director of equity research at forecaster FuisonIQ. "The foreclosure process is how an overpriced market returns to normalcy ... and excess interference will only slow down the eventual return to a healthy economy."
